We are negative on Pecan FPSO’s LOI termination, as it has a direct devaluation impact to the company. While the project may still be revived, we believe a reconceptualization is needed given its breakeven cost at USD40-50/barrel. Stress-testing YINSON’s valuations, the yet-to-be-awarded Parque das Baleias project pose the likeliest risk of not materialising, despite YINSON being the sole bidder. Positively, all projects in its order-book have relatively low risk of termination, given iron-clad clauses. Maintain OP, but with lowered TP of RM6.55.

Termination of Pecan FPSO LOI. On 31 March 2020, YINSON received a notice from Aker Energy to terminate the letter of intent (LOI) issued on 20 February 2020. The termination is due to the decision made by Aker Energy to postpone development of the project until further notice amidst the Covid-19 pandemic.

Negative on the termination news. Naturally, we are negative on the news. We have previously priced-in the Pecan project FPSO into our SoP-valuation (contributed to RM1.80/share in our previous SoPvaluation), and hence, this termination would directly result in a devaluation of the company. While it is entirely possible for the project to be revived, we believe the project would first need to undergo a reconceptualization with financial breakeven for the project reported to be USD40-50/barrel.

Are any other projects at risk of termination? Among the projects included in our SoP, the Parque das Baleias FPSO project by Petrobras stands out with the highest risk of not materialising, as it is the only one that has yet to be finalised into an official contract. Meanwhile, all the other projects are already included into the company’s order-book. Already secured contracts in the order-book should have a relatively low risk of termination, seeing that there are iron-clad termination clauses in place. As for Parque das Baleias, we see that a renegotiation of commercial terms, or a delay in project commencement date as highly possible, despite YINSON being the only bidder for the project. Petrobras had recently announced a 29% slash in its annual capex budget, portraying the oil major’s gradually cautious stance amidst this oil price downturn.

Maintain OUTPERFORM, slashed SoP-TP to RM6.55 (from RM8.80 previously), as we (i) removed the Pecan FPSO entirely from our valuation, and (ii) reduced our valuation of Parque das Baleias FPSO to RM1.65 per/share (from RM2.10/share), as we increased our applied discounting rate to 8% (from 7%) to reflect on the increased risks. That said, given most of its borrowings are project financed, ring-fenced around the project assets and guaranteed by clients, YINSON has a relatively low risk of default despite the oil price downturn.

Ventures into Indian solar plants. Meanwhile, YINSON is seeking to acquire 37.5% equity interest in an Indian-incorporated company, Rising Sun Energy Pte Ltd, which has two operational solar plants in the Bhadla Solar Park, Rajasthan, India. We are overall neutral on this news (which is too immaterial to even trigger a Bursa announcement) which hardly has any significant financial impact. However, it marks as one of YINSON’s steps towards diversifying into renewable energy for the long term (refer to next page for further discussions on this topic).

Risks to our call include: (i) project execution risk, (ii) weaker-thanexpected margins, (iii) termination of contracts, and (iv) force majeure events.

Source: Kenanga Research - 2 Apr 2020